BRASILIA, Jan 23 (Reuters) - Brazil's government faces adilemma over how to free itself of the constraints of a strictbudget surplus target to boost spending in a sluggish economywithout sending out signals that its fiscal discipline isslipping, senior government sources told Reuters.

Economists agree Brazil's primary surplus target fixed at3.1 percent of gross domestic product is very high for a majoreconomy and could be lowered without harm. Brazil's finances arein healthy shape, it has reduced its public debt and broughtinterest rates down to historic lows.

So why not ease up on a fiscal target that it had troublemeeting last year? Two reasons.

Any change in the government savings target is bound toraise concerns that leftist President Dilma Rousseff istinkering with policies that have been the basis of Brazil'sfinancial stability since 1994. Investors watch the primarysurplus closely as they see it as a gauge of fiscal disciplinein the world's No. 6 economy.

Relaxing the target could also trigger spending pressuresfrom state and local governments who might take it as a greenlight to spend more ahead of next year's general elections. Thatwould fuel inflation which is already speeding up.

Rousseff's government has signaled it is willing to loosenbudget restrictions to boost an economy that seems impervious tomore than a year of stimulus measures.

The government is considering two options.

One is to go ahead and formally lower the primary surplustarget to free up spending for investment. But that could leadto a slide in fiscal discipline in state and local governmentsthat senior officials such as Finance Minister Guido Mantegawant to avoid.

The primary surplus - or revenues minus expendituresexcluding debt payments - is a measure of a country's ability torepay its obligations. A more relaxed goal allows the governmentto cut more taxes for industries in a bid to boost investment.

According to three administration sources, Mantega isopposed to reducing the fiscal target this year and would preferto continue the creative accounting that Brazil has been usingto meet the target on paper.

This second option involves excluding more investment of thenational infrastructure program from the primary fiscal numbersso that the government can say it is still on track with itsfiscal target. The accounting maneuver is allowed underBrazilian law, but the calculation is not recognized by theInternational Monetary Fund.

"The minister is leaning more in favor of raising the amountof investments that would be deducted from the primary goal,"said a government official with knowledge of the talks."Reducing the primary target raises spending pressures frompublic workers and legislators who want to increase currentspending. We don't want that."

Rousseff's position is not known. Mantega, a powerful memberof her economic team, is Latin America's longest serving financeminister, though there has been speculation that he may be onhis way out after two years of disappointing economic growth.

Other members of the government blame the high fiscalsurplus goal for once-booming Brazil's paltry economic growth.

"We are one of the few countries in the world that has sucha high primary surplus target. That goal is restricting ourinvestment, it is not allowing us to grow more," a seniorgovernment source told Reuters.

"Mantega has a very stubborn position on an issue that ismaking Brazil the laughingstock of the world," he said.

Financial markets see Brazil's overall finances as solid ata time when Europe and the United States are struggling to cuttheir mounting debts. Brazil nearly halved its public debt to arecord low of 35 percent of GDP in the last decade.

The government missed its 2012 primary surplus goal of 139.8billion reais by a long shot after a slowdown in tax revenues.At the last minute, officials tapped into the country'ssovereign wealth fund and brought forward dividend payments fromstate-run companies to meet an already reduced primary goal.

Private economists warn that a more relaxed fiscal policycould stoke already-high inflation in a country that was scarredby bouts of hyper-inflation in the 20th century.

Inflation rose faster than expected in the month tomid-January, driven by higher costs for food and personalexpenses, statistics agency IBGE said on Wednesday.

"The problem with lowering the primary target is that itwould generate inflationary pressures, which are likely to putthe central bank in a difficult position because the inflationoutlook is not looking good," said Alessandro del Drago, chiefeconomist with Kinea in Sao Paulo.

"The issue here is more about aggregate demand than aboutthe sustainability of the debt."